the role of environmental dynamics in building a first mover

THE ROLE OF ENVIRONMENTAL DYNAMICS INBUILDING A FIRST MOVER ADVANTAGE

THEORY

FERNANDO F. SUAREZBoston University

GIANVITO LANZOLLACass Business School

We advance first mover advantage (FMA) theory by examining how the pace of marketevolution and technology evolution potentially enables or disables FMA. Integratingseveral streams of literature, we elaborate on the interplay among these two envi-ronmental (macro) conditions and the “isolating mechanisms” that underpin FMA. Wemodel these dynamics to help researchers negotiate the current debate, arising fromconflicting empirical evidence, on the conditions necessary for FMA to exist.

In the management literature the conceptualappeal of first mover advantages (FMA) is evi-dent. Using “first mover advantage” as key-words, our search for peer-refereed journal arti-cles in the Business Source Premier databaseyielded a total of 839 articles. The concept hasalso enjoyed ample diffusion in the practitioner-oriented literature and has fueled aggressiveclaims and an ongoing debate about whetherthe advantage actually exists. Consider, for in-stance, Arthur’s claim that “two maxims arewidely accepted in knowledge based markets: itpays to hit the market first and it pays to havesuperb technology” (1998: 100). This assertioncontrasts sharply with Sandberg’s claim that “inmost cases . . . being the first mover is no guar-antee of success” (2001: 3).

The academic literature has been unable toprovide conclusive empirical evidence to sup-port or refute the existence of FMA. Some empir-ical studies point to a negative relationship be-tween order of entry and such measures of afirm’s performance as market share (Bond &Lean, 1977; Robinson, 1988; Robinson & Fornell,1985; Whitten, 1979), long-term profitability(Lambkin, 1988), and survival (Robinson & Min,2002). Other studies show little or no evidence ofa relationship between order of entry and a

firm’s market share (Golder & Tellis, 1993; Lilien& Yoon, 1990; Schnaars, 1986), higher return oninvestment (Boulding & Christen, 2001), or fail-ure risk (Shepherd, 1999). Several authors haveidentified important shortcomings in the exist-ing empirical literature on FMA, which may ex-plain some of the contradictory findings. Amongthese shortcomings are inconsistencies in thedefinition of the dependent variables, biasedsample selection, and failure to control for en-trant capabilities (Anderson & Paine, 1978; Ra-manujam & Venkatraman, 1984; Szymansky,Troy, & Bharadwaj, 1995; Vanderwerf & Mahon,1997). Despite these methodological limitations,Lieberman and Montgomery (1988) and Kaly-anaram, Robinson, and Urban (1995) have drawna few common patterns or “emerging regulari-ties” from empirical research: (1) FMA seems tobe associated with specific product categoriesand industry characteristics (e.g., consumerpackaged goods show persistent evidence ofFMA), (2) FMA tends to be observed mainly in theform of higher market share, and (3) the longerthe lead time to competitive entry, the higher thelikelihood of achieving FMA, although this prob-ability dissipates over time.

FMA theory has developed in three concep-tual categories. First, the basic “isolating mech-anisms” through which first movers’ “entrepre-neurial rent” can be protected from imitativecompetition have been identified and classified(Rumelt, 1987; see Lieberman & Montgomery,1988, for a review). A second stream of research

We gratefully acknowledge generous funding from theLeverhulme Trust, as well as support from Boston UniversitySchool of Management and Cass Business School. We alsoacknowledge valuable input from three anonymous review-ers.

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on the “micro” side of FMA theory has exploredthe firm-level resources and capabilities thatallow organizations to exploit FMA (e.g., Robin-son, Fornell, & Sullivan, 1992). Finally, a smallnumber of researchers have investigated thetheory’s “macro” aspects, or the relationship be-tween environment and competitive advantagebased on order of market entry (e.g., Lambkin,1988). In the following section we extensivelyreview each of these three literature streams.Despite progress so far, existing FMA theory hasbeen unable to sort out the conflicting evidencegenerated by empirical studies and to providemanagers with coherent guidelines for strategy.Lieberman and Montgomery’s recent strongclaim that “many of the fundamental conceptualproblems that we discussed [in their seminal1988 paper on the topic] remain unresolved”(1998: 1111) is a stern but realistic assessment ofprogress with FMA theory to date.

In this paper we tackle the challenge of ad-vancing existing FMA theory by investigatingthe role of a firm’s environment in enabling ordisabling FMA. Our contribution here is three-fold. First, we explicitly draw attention to themacro side as a level of analysis that haslargely been missing in the literature on FMA.1

We show that a careful articulation of the macroaspects of FMA theory can significantly en-hance our understanding of the FMA phenome-non and can help to make sense of today’s con-flicting empirical findings. We argue that thecurrent inability either to reject or to lend sup-port to the conceptual claims of FMA proponentsprobably has to do not only with shortcomingsin the methods used by empirical research-ers—a limitation often acknowledged in the ex-isting literature—but also with shortcomings inexisting theory. While the micro side of FMAtheory is an important factor in analyzing afirm’s ability to materialize FMA, firm resourcesand capabilities per se seem to be only onecomponent of a broader set of factors that alsoinclude environmental variables and even“luck” (Lieberman & Montgomery, 1988).

Second, integrating arguments from the tech-nology management, marketing, and industrialorganization literature, we explain how two

components of a firm’s environment—the paceof technological change and the pace of marketevolution—interact with FMA isolating mecha-nisms—for example, resource preemption, tech-nology leadership, and buyer’s switching costs(Lieberman & Montgomery, 1988).

Third, by focusing on the pace of evolution ofboth market and technology, we introduce anexplicitly dynamic dimension into the macroside of FMA theory. We argue that the enablingor disabling effect of the environment on FMAdepends not only on the environmental condi-tions at the time of entry but on their evolutionover time.

In the following section we locate our contri-bution to the current theoretical debate with areview of existing FMA literature. Next, we pro-vide a theoretical justification for our two pro-posed environmental dynamics and use thoseconstructs to develop a model of enabling envi-ronmental conditions for FMA. We close the pa-per by discussing ways to integrate our modelwith existing firm-level research to further un-derstanding of the FMA phenomenon.

EXISTING FMA THEORY

The concept of FMA emerged not from theoret-ical insights but from anecdotal and empiricalevidence demonstrating that first movers’ com-petitive performance tended to be better thanthat of later entrants. Research funded by theU.S. Federal Trade Commission in the 1970sshowed that, in both the prescription drug (Bond& Lean, 1977) and cigarette product categories(Whitten, 1979), first entrants enjoyed enduringperformance advantages over later entrants.This “first mover advantage” concept attractedattention from management researchers, whobegan, in the 1980s, to search for theory-basedexplanations for why first movers tended to earn“profits in excess of the cost of capital” (Lieber-man & Montgomery, 1988: 41), to achieve largermarket share, or to survive longer than compet-itors.

Isolating Mechanisms

In the search for rationales behind FMA driv-ers, researchers borrowed mainly from two in-dependent and unrelated streams: economicsliterature and consumer behavior literature.These two streams provided rationales for the

1 Brown and Lattin (1994) suggest that if FMA are to exist,they should be conceptually observable ceteris paribus (i.e.,given comparable levels of firm resources and capabilities).

378 AprilAcademy of Management Review

existence of “isolating mechanisms” (Rumelt,1987) underpinning FMA. Borrowing from eco-nomics theory, some researchers argued thatfirst movers could preempt competitors from ac-cessing valuable spaces (Hotelling, 1931; Pres-cott & Visscher, 1977) or production resources(Bain, 1956; McMillan, 1983), achieve economiesof scale from initial investments (Dixit, 1985),benefit from patenting key innovations (Gilbert& Newbery, 1982), achieve cost advantages vialearning economies (Lilien & Yoon, 1990; Spence,1977), and create cost advantages derived fromcausal ambiguity and imperfectly imitableknowledge and practices (Lippman & Rumelt,1982; Reed & DeFilippi, 1990). Other researchers,drawing on behavioral and cognitive theories,argued that FMA could result from cognitiveswitching costs arising from buyers’ habit for-mation (Schmalensee, 1982), consumer learningand reputation advantages (Carpenter & Naka-moto, 1989), and high buyers’ searching cost(Nelson, 1980).

The identification of these different drivers orisolating mechanisms has been the focus ofmuch of the theory-oriented FMA literature todate. The mechanisms have been polished, clas-sified, and reclassified several times. For in-stance, Golder and Tellis (1993) proposed pro-ducer-based versus consumer-based FMAdrivers. Day and Freeman (1990) classified thedrivers as resources preemption, proprietary ex-perience effects, and leadership reputation.Mueller (1997) proposed two broad groups: de-mand-related or “inertial advantages” and sup-ply-related or “efficiency advantages.” AndKerin, Varadarajan, and Peterson (1992) clus-tered them as economic factors, preemption fac-tors, technological factors, and behavioral fac-tors. Most widely accepted, however, isLieberman and Montgomery’s (1988) classifica-tion of FMA isolating mechanisms into threecategories: technology leadership, preemptionof scarce assets, and switching costs/buyerchoice under uncertainty.

Given the importance of this latter paper inthe FMA literature, we use this taxonomy as abuilding block for our own proposal. FMA intechnology leadership include isolating mecha-nisms, such as learning and experience effectsand R&D patenting, that give a firm a techno-logical edge over competitors; preemptivemechanisms encompass cost advantages aris-ing from advanced appropriation of scarce input

resources, forestalling bids for product charac-teristic spaces, and economies of scale createdfrom preemptive investment in the plant andequipment; and switching costs arise from habitformation in buyers or from the installed-baseeffect in the presence of network effects.

Micro Aspects of FMA Theory

An important group of research studies inves-tigated the effect of firms’ characteristics oncompetitive advantages based on order of entryinto markets. Fueled largely by researchers inthe resource-based view of the firm and in in-dustrial economics, this literature stream hasidentified firms’ assets and strategic maneuver-ing as the key to capturing possible benefitsfrom early entry. In this view, a firm’s ability toderive FMA should be assessed “with referenceto the competence and capabilities which newentrants have, relative to the competitors”(Teece, Pisano, & Shuen, 1997: 529; see also Fuen-telsaz, Gomez, & Polo, 2002, and Robinson &Chiang, 2002).

A recent study based on PIMS (Profit Impact ofMarket Strategy) data shows that first movers,early followers, and late entrants tend to deploydifferent skills and resources (Robinson et al.,1992). Some studies outline the substantial effectof a firm’s history on the relationship betweenorder of entry and market performance (Carroll,Bigelow, Seidel, & Tsai, 1996; Klepper, 2002). Forexample, Klepper and Simons (2000), studyingthe U.S. receiver industry, found that firms withexperience in radio technology are most likelyto enter TV manufacturing, to have higher inno-vation rates, and to capture higher market shareand survive longer. Schoenecker and Cooperfound that “firms with large R&D intensities,that possess a direct sales force, and that havegreater internal financial resources will be ear-lier entrants in industries with significant op-portunities to build first mover advantages”(1998: 1132). Murthi, Srinivasan, and Kalyanaram(1996), analyzing 236 business units over a pe-riod of three years, found that pioneering advan-tages are significant when managerial skillsare factored in. Rosenbloom and Cusumano(1987) discussed how firms’ R&D capabilitiesand their strategy with respect to “technologypioneering” played an important role in thecompetitive outcome of the VCR industry. Mitch-ell (1991) outlined the role of specialized assets

2007 379Suarez and Lanzolla

in the strategies of new entrants and incum-bents entering new technical subfields of thediagnostic imaging industry.

Macro Aspects of FMA Theory

The role of the environment in organizationaldynamics has long been studied in the variousstreams of organizational theory (e.g., Barnett &Carroll, 1995; Hannan & Freeman, 1989; Law-rence & Lorsch, 1967; Perrow, 1979; Pfeffer &Salancik, 1978; Scott, 1992). In a seminal work,Dess and Beard (1984) summarized previous lit-erature by proposing three environmental at-tributes that affect organizational performance:munificence, dynamism/instability, and com-plexity. McArthur and Nystrom (1987) and Covinand Slevin (1989) found environmental munifi-cence to be a significant predictor of the strategy-performance relationship, and Lambkin (1988)predicted the order of entry strategies mostlikely to succeed under three environmental di-mensions: variability, grain of the variability,and uncertainty.

Using game theory tools, stylizing the FMAissue as an allocation problem given a certainmarket structure, and assuming rationally com-peting agents, the industrial organization liter-ature outlines the conditions under which a firmdeliberately decides whether to be a first moveror a later entrant. According to this literature,FMA are affected by such variables as degree ofcompetition (Farrell & Saloner, 1985; Gal-or,1985; Jensen, 1982; Reinganum, 1981), marketstructure (Katz & Shapiro, 1986, 1992), and timeelapsed between first and second mover entry(Glazer, 1985).

The strategy literature addresses the relation-ship between the environment and FMA. Forexample, contingency theorists propose thatfirm performance results from coalignment ofthe environment and a firm’s resources, struc-ture, and processes (Andrews, 1971; Lawrence &Lorsch, 1967; see Aragon-Correa & Sharma, 2003,for a review). Porter (1985) argues that advan-tages derived from entry timing are conditionedto industry characteristics, and he proposes ataxonomy of entry strategies vis-a-vis techno-logical change in products and processes. Teece(1986) relates a firm’s ability to profit from tech-nological innovation to the specific appropri-ability regime that surrounds the innovation, theemergence of a dominant design, and the firm’s

possession of complementary assets. He arguesthat “when imitation is easy, markets do notwork well and the profits from innovation mayaccrue to the owner of some complementary as-sets, rather than to the developers of the intel-lectual property” (1986: 285). Nehrt (1998) hasstudied the impact of government regulation onthe sustainability of FMA.

We identify two main shortcomings in exist-ing macro FMA theory. First, it is not sufficientlycoupled to the core constructs of FMA theory.The environmental elements considered are, forthe most part, independent and unrelated, andthe link between them and FMA isolating mech-anisms is weakly explored. Second, most of thevariables identified in the literature are con-cerned with the existence/nonexistence of spe-cific environmental characteristics only at thetime the first mover enters the market (e.g., reg-ulation, appropriability regime), and not withthese characteristics’ temporal development.

TOWARD AN FMA THEORY INCLUDINGENVIRONMENTAL DYNAMICS

We argue that for FMA theory to be advancedin its macro aspects, the interplay between theenvironment and the FMA isolating mecha-nisms must be addressed much more formally.Consequently, our first task is to identify theenvironmental dimensions that have the stron-gest influence on the effectiveness of the FMAisolating mechanisms. Integrating several argu-ments from industrial economics, consumer be-havior, strategy, and technology management,we isolate two environmental components thatcan help capture the essence of this interplay:the pace of technology evolution and the pace ofmarket evolution. By introducing these explicitlydynamic components and by explaining whyand how these dynamics play an important roleas enablers or disablers of the isolating mech-anisms that give rise to FMA, we advance themacro side of FMA theory and, thus, contributeto a richer, more integrated FMA theory overall.We assume that these two environmental com-ponents evolve independently, but we expectthe implications of our framework to hold evenwhen there is endogeneity between market andtechnology dynamics, as we explain in the lastsection of the paper.

In Figure 1 we place our proposed theoreticalcontribution (dotted-line boxes) beside the exist-


ing constructs, suggesting an avenue throughwhich to integrate the existing components ofFMA theory into a more comprehensive frame-work. Figure 1 shows that the isolating mecha-nisms’ effectiveness in generating FMA for afirm in a given situation depends on both firm-level (micro) and environment-level (macro) en-abling conditions. The micro side of the theoryrelates to firm-level resources and capabilitiesthat allow organizations to exploit FMA. Themacro side of the theory relates to the charac-

teristics of a firm’s environment that influenceFMA. Each set of FMA enablers in the figure(central boxes) is connected by an arrow to itscorresponding theoretical foundations (upperboxes). The isolating mechanisms are drawn asa class of their own, consistent with Liebermanand Montgomery (1988).

For the purposes of this analysis, we define“first mover” as the first firm—or the first fewfirms when the market lead time that separatesthem is insignificant—to enter a new product

FIGURE 1Toward a Comprehensive Theory of FMA


category. This definition is consistent with mostof the existing literature and allows the termsfirst mover, market pioneer, or early entrant tobe used interchangeably. We define “first moveradvantage” as the performance gain that a firmattains from being first to market in a new prod-uct category, once other effects (namely, firmresources, lead time) have been controlled for.Empirical evidence suggests that first moverperformance gains are typically reflected in eco-nomic profit or market share (Lieberman & Mont-gomery, 1998).

Theoretically, investigation of FMA shouldconcentrate on the time period during which theisolating mechanisms have maximum potentialto affect first movers’ competitive performance.There is broad agreement that the drivers ofcompetitive advantage change over time (Utter-back & Abernathy, 1975). For instance, Agarwal,Sarkar, and Echambadi, reviewing the evolu-tionary economics, population ecology, andtechnology management literature, concludethat “there appears to be convergence on thenotion that at a particular point in time in anindustry’s history, a structural change occursthat changes the resource conditions associatedwith competitive advantage” (2002: 976); the au-thors call this dividing point the “onset of matu-rity phase.” Consistent with these theoreticalobservations, we argue that FMA isolatingmechanisms should be investigated in the pe-riod spanning from first product introduction tothe onset of maturity (OM) in an industry. AfterOM, other competitive mechanisms are likely toinfluence a first mover’s competitive perfor-mance (e.g., commoditization, modularization,consolidation; see Porter [1980] for an extensivereview of competitive mechanisms in matureindustries). Our argument here is consistentwith the empirical regularity, identified byLieberman and Montgomery (1988: 1121), thatFMA “dissipates over time.”

Operationally, OM can be defined as the in-flection point in the industry’s cumulative salescurve (the inflection point is the time at whichsales per year peak). Alternatively, OM can beidentified using discriminant analysis, as inAgarwal et al. (2002). As these authors show, OMcan vary considerably across product catego-ries. For example, cathode ray tubes and freoncompressors, both launched in 1935, reached theOM phase in 1967 and 1980, respectively.

In the analysis that follows, we define pace ofmarket evolution and pace of technology evolu-tion with reference to the period spanning fromfirst product introduction to OM. In particular,pace of market evolution is defined as the aver-age market change up to OM. Similarly, pace oftechnology evolution is defined as the averagechange in the level of technology performanceup to OM. We now show why and how the paceof technology evolution and the pace of marketevolution affect the three FMA isolating mecha-nisms: technology leadership, preemption ofscarce assets, and switching costs.

Pace of Technology Evolution and IsolatingMechanisms

Once a new product category emerges, itscore technology may evolve along a number oftrajectories (Abernathy & Utterback, 1978; Ander-son & Tushman, 1990; Nelson & Winter, 1982;Suarez & Utterback, 1995; Tushman & Anderson,1986) and design hierarchies (Clark, 1985; Dosi,1982). Different product categories may experi-ence very different paces of technology evolu-tion up to OM. For example, the degree of effi-ciency improvements for vacuum cleaners overthe early phase of that industry (Agarwal &Bayus, 2002) was marginal when compared tothe improvements in CPU clock speed in theearly PC industry. The pace of technology evo-lution can be captured through the technology“S curve” (Cooper & Schendel, 1976; Foster, 1986;Sahal, 1982) that represents—in technicalterms—the evolution of a technology along aparticular performance parameter as more “de-velopment effort” is poured in. The technologyS-curve framework has been extended to ana-lyze cases of technological “discontinuities” or“disruptive” technologies (Utterback & Kim,1986). For instance, Christensen (1997) has usedan S-curve framework to illustrate how differentgenerations of computer disk drives improvednot only along the technology performance pa-rameters of previous generations but also alongnew performance parameters.

The pace at which technology evolves directlyaffects the possibility of deriving FMA throughtechnology leadership. For instance, the advan-tage derived from entering first into a marketcan be linked to a firm’s ability to keep up withthe evolution of knowledge within the industry.Technology evolution may render a firm’s


knowledge obsolete, destroy existing compe-tences (Henderson & Clark, 1990; Leonard Bar-ton, 1992; Schilling, 2002; Tushman & Anderson,1986), and negate possible “experience curve”advantages (Lieberman, 1989). Bohlmann, Gold-er, and Mitra (2002) provide theoretical and em-pirical evidence that FMA are difficult to sustainin product categories with high “vintage ef-fects”—that is, where product quality signifi-cantly improves over time. Christensen, Suarez,and Utterback found that, in the fast-changingrigid disk drive industry, “the notion of firstmover advantage is not applicable” (1998: S207).Similarly, Christensen (1997) shows how techno-logical change allowed for a new breed of lateentrants in the steel and disk drive industries.

Rapid technology evolution also influencesthe effectiveness of patents and other forms ofintellectual property protection. The economicsliterature on patenting has shown that a firm’sability to protect its underlying product technol-ogy varies across industries (Levin, Klevorick,Nelson, & Winter, 1987). Empirical evidence sug-gests that about 60 percent of successful inno-vations are imitated within four years (Mans-field, Schwartz, & Wagner, 1991). A fast pace oftechnology evolution may give latecomersplenty of opportunities to “invent around” apatent and come up with improved products thatdo not necessarily infringe on patent rights.These technology-driven options or gateways(Bain, 1956) to the market reduce the effective-ness of intellectual protection and provide moreopportunities for later entrants to challenge firstmovers’ technology leadership.

Technological evolution also affects key ante-cedents of buyers’ switching costs, such as do-main expertise (Wernerfelt, 1985) and consumerpreference formation (Carpenter & Nakamoto,1989). Again, rapid technological evolutiontends to result in a succession of different tech-nology generations or “vintages,” each of whichrenders the previous one obsolete. When buyersperceive this “technological uncertainty,” theytend not to commit themselves to product-specific learning (Carpenter & Nakamoto, 1989;Schmalensee, 1982). This phenomenon is partic-ularly relevant for experience goods that can beevaluated only after purchase (Nelson, 1980) andfor standards-war situations in which producersof two or more incompatible technologies com-pete for market dominance (Suarez, 2004). Firstmovers who risk introducing an “underdevel-

oped” product also incur the risk that “negativeword of mouth” will make final customers morewilling to switch to alternative products (Kalish& Lilien, 1986).

Pace of Market Evolution and IsolatingMechanisms

The market evolution of consumer and indus-trial product innovations is generally character-ized by an initial period of slow growth imme-diately after first product commercialization;this phase is eventually followed by a sharpincrease or “sales takeoff” (Golder & Tellis, 1993;Klepper, 2002; Mahajan, Muller, & Bass, 1990;Rogers, 1995) and, as discussed above, a laterphase of market maturity and decline (e.g., Ma-hajan et al., 1990). Empirical evidence (Agarwal& Bayus, 2002) shows that the time from initialproduct commercialization to sales takeoff andindustry maturity can vary considerably acrossproduct innovations. Some product categoriesshow very high sales growth from the start (e.g.,compact disc players and cellular phones),whereas others languish for many years withslow sales (e.g., dishwashers).

Market evolution in a given product category,often measured in sales, household penetration,or number of adopters, is influenced by severalmarket-related dynamics. These can includechanges in consumer tastes or preferences(Moore, 1999), emergence of new regulations, de-gree of market fragmentation, and consumerlearning (Agarwal & Bayus, 2002). Our core con-struct—pace of market evolution—reflects thecombined effect of these market-related dynam-ics within a product category.

Several researchers have studied the impactof market evolution on the relationship betweenorder of entry and performance. In a study ofthirty-three product innovations, Agarwal et al.(2002) found that an industry’s growth patternhas a significant “conditioning effect” on therelationship between entry timing and firm sur-vival; Bohlmann et al. (2002) suggest that FMAare more sustainable in markets where horizon-tal (as opposed to quality-based) product differ-entiation predominates, a situation more com-mon in slow-growing (mature) markets(Utterback, 1994).

The pace of market growth has important im-plications for the effectiveness of buyer pre-emption mechanisms. The ability of a firm to


preempt scarce market resources has beenshown to depend on the pace at which an indus-try is growing. A situation of high market growthimplies that, at any point in time, there willalways be sufficient market resources (e.g.,enough buyers) for new entrants. This is consis-tent with theoretical models of industrial orga-nization, which show that a fast-growing marketin the presence of network effects is crucial toovercoming a new product’s entry timing advan-tage (Katz & Shapiro, 1992). Organizational the-orists have shown that environmental munifi-cence—that is, the scarcity or abundance ofcritical resources needed by firms operatingwithin an environment—effectively determinesthe rate at which new competitors can be addedto the population (Pfeffer & Salancik, 1978).

A further aid to understanding the role playedby the pace of market evolution in the effective-ness of competitive mechanisms appears in Fig-ure 2. Let us call M the cumulative level of mar-ket-related resources in a given productcategory (e.g., cumulative buyers or cumulativesales) and MOM the level of market-related re-

sources at the industry’s OM. Let us further con-sider two reference scenarios for the pace ofmarket evolution: an abrupt pace (curve B inFigure 2) and a smooth pace (curve A). For anyfixed �T, firms operating in an environment witha higher pace of market evolution will benefitfrom a greater level of available market re-sources. In fact, the segment “ab,” representingmarket resources deployed in �T in scenario B,is longer than the corresponding segment, “bc,”for scenario A. Unlike the slow pace scenario,when market growth occurs at a fast pace, otherthings being equal, a larger amount of con-sumer resources becomes available to the exist-ing companies in the market for any given �T;this process undermines early entry inertial ad-vantages (Katz & Shapiro, 1992). Alternatively,for any given fixed �M, there is a longer V� t inreference scenario A (V� t, A), slow-paced marketgrowth, than in reference scenario B (V� t, B), fast-paced market growth. That is, a fixed amount ofresources will have to “feed” all active firms fora longer period of time in scenario A than inscenario B, assuming a given distribution of en-

FIGURE 2Two Scenarios for Pace of Market Evolution


try and exit into the market over time (the longerthe time, the greater the number of entrants).Researchers have found that the scarcity of en-vironmental resources tends to enable order ofentry-based advantages (Dierickx & Cool, 1989;Lambkin, 1988).

The arguments presented in this section sug-gest that the pace of technological and marketevolution plays an important role in enabling ordisabling FMA isolating mechanisms. There-fore, we offer the following proposition.

Proposition 1: The pace of technologi-cal evolution and the pace of marketevolution will affect the effectivenessof FMA isolating mechanisms.

IMPLICATIONS FOR FMA STRATEGIES

Building on the two environmental dynamicsdescribed above, we develop a theoretical

model to shed further light on FMA theory anddescribe implications for FMA strategies. Toprovide a parsimonious representation of ourmodel, we outline two scenarios—smooth andabrupt—for the pace at which technology andthe market may evolve. We use the S-curveframework to illustrate our points.2 Recall thatwe define pace of market and technology evolu-tion with reference to the OM phase, and as-sume that other variables relevant for FMA the-ory (e.g., firm resources, lead time) are constantacross the resulting scenarios.

2 We use the S-curve framework to operationalize andintuitively understand our two core constructs, pace of tech-nology evolution and pace of market evolution. Although theS-curve framework does not capture the entire granularity intechnology and market evolution that is reflected in theresulting pace of evolution from product introduction to OM,it does help to illustrate alternative scenarios.

FIGURE 3A Model of Environmental Dynamics and FMA


Our model is illustrated in Figure 3 as a ma-trix with four quadrants, each of which repre-sents a different combination of environmentaldynamics. The implications for each quadrantare discussed below.

Smooth Market Growth and SmoothTechnology Improvement (Quadrant I)

When both market growth and technology de-velopment move at a smooth pace, early en-trants have the best chance of benefiting fromFMA. By making it easier for first movers to graba significant share of market resources andharder for later entrants to find space to growand survive, a smooth pace of market evolutionreduces the likelihood that later entrants will beable to break the first mover’s “inertial” advan-tages (Katz & Shapiro, 1992). Because first mov-ers are able to control a larger share of themarket, customers are less likely to engage inthe “hold-up” and “wait and see” attitudes theytypically adopt when no clear industry leader isperceived (Carpenter & Nakamoto, 1990). In aclassic reinforcing loop, lower customer hold-uptends to favor the market pioneers. The cogni-tive literature suggests that learning occursmore effectively when the environment is stable(e.g. Polanyi, 1983) and that more effective learn-ing is associated with higher cognitive switch-ing costs that favor first movers.

Where the advantage is based on technologyleadership, a smooth pattern of technology andmarket growth also tends to work in favor of firstmovers, since later entrants will be less able tochallenge first movers by using improvementsin technological performance to differentiatetheir products. Even if the challengers were tosucceed, first movers would be able to catch uprapidly by improving on their own products, ex-ploiting their experience curve, and carefullyselecting the most valuable technologies andskills (e.g., Tushman & Anderson, 1986). Unableto rely on technology, later entrants will havetrouble differentiating their offerings from thoseof first movers. Lane (1980) and Prescott and Vis-cher (1977) show that when product differentia-tion in the market is unlikely to occur, later en-trants incur greater costs in their efforts to gainmarket share. Similarly, Bohlmann et al. (2002)show strong evidence of FMA when differentia-tion or “horizontal variety” is the main driver ofcompetition, a situation that occurs more often

in the mature industries in their sample. Be-cause it simplifies sound technical and commer-cial decision making, a predictable environmentbenefits first movers (e.g., Weick 1993); smoothtechnological evolution may also increase theeffectiveness of a firm’s R&D patenting. Levin etal. (1987) show that R&D patent protection ismore effective in the inorganic and organicchemicals industries and the traditional drugsindustry, all of which are characterized by arelatively slow pace of technology evolution.

Current empirical evidence supporting the ex-istence of FMA comes mostly from new productcategories in mature industries. For instance,Robinson and Fornell (1985) analyzed 371 matureconsumer products and found that pioneershave substantially higher market share than fol-lowers; Robinson (1988) found a similar patternfor industrial goods. Bond and Lean (1977) andWhitten (1979) found first entry brand advan-tages for two prescription drugs and seven cig-arette product categories, respectively, whileUrban, Carter, Gaskin, and Mucha (1986) foundthat pioneers outperformed later entrants intwenty-four frequently purchased consumerproducts. Mature industries such as those de-scribed in the cited studies tend to show asmooth pace of market and technology evolu-tion, because the underlying technology has al-ready reached a phase characterized by de-creasing returns and because new productintroductions often relate to the simple exten-sion of existing products (e.g., a new cereal flavor).

As Figure 3 and the above discussion suggest,environmental elements are aligned to favorFMA when both technological and market evo-lution are smooth. Thus, Proposition 2 follows.

Proposition 2: When the pace of mar-ket evolution and the pace of technol-ogy evolution are both smooth, the en-abling effect of environmentalelements on isolating mechanismswill be strongest.

Proposition 2a: In this situation—controlling for firm-level differences—FMA will likely occur.

Abrupt Market Growth and Abrupt TechnologyImprovement (Quadrant III)

We argue that, in a scenario exactly oppositethat above, when market growth and technology


improvement both proceed abruptly, early en-trants are least likely to benefit from FMA. Be-cause abrupt market and technology dynamicshave a high potential to undermine the effec-tiveness of isolating mechanisms, early entrantsfind FMA based on technology leadership moredifficult to achieve; conversely, later entrantsfind that higher-quality products, or innovativesolutions that can enable powerful vintage ef-fects, are easier to develop (Bohlmann et al.,2002).

A rapidly changing technology also increasesthe risk of first movers’ knowledge inertia orobsolescence. Not only does this condition makeit more difficult for first movers to catch up withthe products introduced by later entrants (Hen-derson & Clark, 1990; Tushman & Anderson,1986), but a weak appropriability context alsoseems to characterize fast-paced industries (e.g.,computers and semiconductors). Levin et al.(1987) found that patenting is largely ineffectivein these industries.

Abrupt technology and market evolution, bycreating uncertainty for firms and consumers,makes sound decision making more difficult forall agents and, thus, also makes it very difficultfor firms to preempt technological and consumerresources. Approaching the problem from differ-ent theoretical angles, Porter (1985), Wernerfeltand Karnani (1987), and Weick (1993) suggestthat erroneous organizational decisions arelikely to be made in high-uncertainty situations.Gal-or (1985) argues that the higher the uncer-tainty, the more reluctant firms are to commit tolong-term contracts to secure key factor inputs.Abrupt technology and market evolution caneven disable switching costs, which often favorfirst movers, since negative word of mouth ef-fects can develop the perception that later en-trants’ products are superior (Kalish & Lilien,1986). An abrupt market evolution also will easelater entrants’ efforts to find market spaces thathave not yet been exploited by incumbents(Christensen, 1997). Katz and Shapiro (1992) haveshown that “excess inertia”—a bias toward thecompetitive advantage achieved by an earlierentrant—can be overcome under the assump-tion of fast market growth.

Current empirical evidence that refutes theexistence of FMA seems to support our hypoth-eses. Bohlmann et al. (2002), analyzing data fromthirty-six product categories, found that FMAcannot be achieved in the presence of strong,

technology-driven vintage effects. Christensenet al., studying the fast-changing disk drive in-dustry and finding that first movers are super-seded by later entrants, posit the existence of an“entry window tightly linked to the emergenceof the product dominant design” (1998: S208). Te-garden, Hatfield, and Echols (1999), analyzingthe rapidly evolving personal computer indus-try, found that not only can later entrants suc-ceed and enjoy high survival rates but can evenmake a “wrong” initial technology choice—say,opting for a design that is later deselected—andstill manage to switch successfully to the win-ning design. Empirical data have been collectedin several case studies of product categories infast-growing environments. Among these, stud-ies of the PC industry (e.g., Schnaars, 1986), cel-lular telephones (Agarwal & Bayus, 2002), VCRs(Rosenbloom & Cusumano, 1987), and micro-waves (Agarwal & Bayus, 2002) have found noevidence of FMA.

In Quadrant III, both environmental elementsare aligned in an abrupt evolutionary pace. Un-like in Quadrant I, where smooth technologyand market evolution enable the effect of FMAdrivers, in Quadrant III abrupt alignment pacedisables FMA drivers. From this reasoning,Proposition 3 then follows.

Proposition 3: Where the pace of mar-ket evolution and the pace of technol-ogy evolution are both abrupt, the dis-abling effect of environmentalelements on isolating mechanismswill be strongest.

Proposition 3a: In this situation—controlling for firm-level differences—FMA will be unlikely to occur.

Abrupt Market Growth and Smooth TechnologyImprovement (Quadrant II) and Smooth MarketGrowth and Abrupt Technology Improvement(Quadrant IV)

Figure 3 illustrates the two remaining quad-rants, II and IV, where market and technologyevolution are not aligned. Unlike the two casesdescribed above, in these situations, one envi-ronmental dynamic tends to favor FMA, whilethe other has an opposite effect. For example, inQuadrant II, a slow pace of technology evolutionfavors early entrants by enabling FMA isolatingmechanisms (as extensively argued in the pre-


vious sections), but a fast pace of market evolu-tion tends to disable the effect of FMA isolatingmechanisms and to favor later entrants. The en-vironmental dynamics exert a similarly conflict-ing effect on the isolating mechanisms in Quad-rant IV: an abrupt pace of technologicalevolution tends to disable the isolating mecha-nisms, while a smooth pace of market evolutiontends to enable them. Therefore, we propose thefollowing.

Proposition 4: Where the pace of mar-ket evolution is abrupt and the pace oftechnology evolution smooth, orwhere the pace of market evolution issmooth and the pace of technologyevolution abrupt, the net effect of en-vironmental elements on isolatingmechanisms will be weaker than incases where both environmental ele-ments are aligned.

CONCLUDING REMARKS AND AVENUES FORFUTURE RESEARCH

In this paper we have advanced FMA theoryby exploring the impact of environmental dy-namics on the effectiveness of the isolatingmechanisms that drive FMA. Integrating in-sights from the technology management, indus-trial organization, and marketing literature, wehave provided a rationale for incorporating twohitherto missing environmental elements—thepace of technology evolution and the pace ofmarket evolution—into FMA theory. In doing so,we have advanced the “macro side” of FMA the-ory by adding an explicitly dynamic elementand by elaborating on the interplay between theenvironment and FMA isolating mechanisms.Our proposed environmental dynamics comple-ment and integrate the existing FMA literaturethat has, to date, largely been focused at themicro or firm level. Taken together with ourmacro, environment-level elements, these theo-retical components open an avenue for buildinga more comprehensive FMA theory, according towhich firm-level variables and environment-level dynamics jointly determine the effective-ness of FMA isolating mechanisms with neitherable to explain independently why a particularfirm enjoys FMA in a given situation.

We have elaborated on our proposed environ-mental dynamics to present a model of FMA-

enabling (or -disabling) environmental contextsand have analyzed two reference scenarios—the smooth and the abrupt pace of technologyand market evolution—to deduce the implica-tions for FMA theory and entry timing strategies.We conclude that environmental dynamics ei-ther impose restrictions or create opportunitiesfor the exploitation of FMA. For example, in en-vironments characterized by a smooth pace ofmarket and technology evolution (Figure 3,Quadrant I), the environmental dynamics arealigned to strongly enable FMA and, otherthings being equal, present the greatest chal-lenge for later entrants to overtake the first mov-ers. Conversely, in an environment character-ized by an abrupt pace of technology andmarket evolution (Figure 3, Quadrant III), theenvironmental dynamics are aligned to stronglydisable FMA and facilitate late entry, otherthings being equal. Quadrants II and IV repre-sent cases in which the two environmentalforces oppose each other and make the net effectof the environment on the FMA isolating mech-anisms weaker than in the previous cases.

Our model also has important implications formanagement practice, the most straightforwardof which concerns entry timing strategy. For agiven level of firm resources and capabilities,the success of a specific entry timing strategywill be affected by the particular dynamics ofmarket and technology evolution; first moverstrategies are most likely to be successful whenthe pace of both market and technology evolu-tion is smooth. Conversely, firms need to be ex-tra careful when attempting to implement firstmover strategies in environments characterizedby an abrupt pace of market and technologyevolution, because, in these situations, theabrupt pace of environmental evolution is likelyto create windows of opportunity for successfullater entry strategies.

Another managerial implication of our modelrelates to the level and typology of resourcesand capabilities required to enable successfulfirst mover strategies in different environmentalconditions. We argue that environmental dy-namics have an enabling/disabling effect onisolating mechanisms, all other things (includ-ing resources and capabilities) being equal.From this conclusion it follows that a given setof resources and capabilities will be more orless “useful” (in terms of helping a firm to obtainFMA), depending on the existing environmental


dynamics in a given situation, as illustrated bythe four quadrants in our model. All other thingsbeing equal, we would expect a given level ofresources and capabilities to be “less useful” inQuadrant III (abrupt–abrupt) than, say, in Quad-rant I (smooth–smooth). To predict the scenarioof environmental dynamics that a first movermay face in a particular case, managers coulduse market forecasting techniques such as thoseoutlined in Bass (1969) and technology forecast-ing methods such as those outlined in Sahal(1982).

The environmental dynamics introduced inthis paper represent building blocks that havethe potential to substantially increase the pre-dictive power of current FMA theory and to openseveral research avenues that could enhanceour knowledge of the FMA phenomenon. Wehave shown that our proposed theory can helpmake sense of the empirical FMA literature;however, as with all theory papers, more formaltests of our propositions are needed.

Further theoretical and empirical research isneeded to gain a better understanding of therelative importance of market versus technologydynamics as enablers/disablers of the isolatingmechanisms. This could help, for instance, tosort out more formally the role of each environ-mental element in situations such as those de-picted in Quadrants II and IV of our model (Fig-ure 3). Additional theoretical and empiricalresearch on the macro side of FMA theory mayallow each isolating mechanism’s relativeweight to be determined more precisely in con-texts such as those outlined in Figure 3. In ad-dition, further research could shed light on thepotential interactions between the pace of mar-ket and technology evolution, which we haveassumed here to evolve independently. We ex-pect the main claims of our model to hold evenin the presence of endogeneity between marketand technology evolution. Were the correlationbetween technology evolution and market evo-lution always perfect, the parsimonious expres-sion of our model would be reduced to one axisinstead of two: abrupt or smooth (which nowwould imply abrupt or smooth in both dimen-sions simultaneously). Our model would then bereduced to two quadrants (I and III), instead offour. We would expect all the reasoning andimplications we develop for these two quad-rants to remain the same. That is, other thingsbeing equal, FMA would be less likely in the

abrupt quadrant and more likely in the smoothquadrant.

Most of the constructs in this article can beeasily operationalized for empirical testing.FMA can be captured with respect to differentfirms’ performance measures, most significantlymarket share and profitability. The pace of mar-ket evolution, as well as the pace of technologyevolution, can be measured by focusing on spe-cific properties relevant to a particular productcategory. For instance, market evolution in mostproduct categories can be measured by tracingtotal sales or household penetration from firstproduct introduction to the point of OM (the lat-ter can be operationalized as the point of inflec-tion in the cumulative sales curve). Similarly,technology evolution can be calculated by trac-ing the performance changes of a core underly-ing technology (e.g., million of instructions persecond in the case of microprocessors) from firstproduct introduction to OM. Consistent with ex-isting literature, the operationalization of con-structs should take into account other variables,such as wars or economic depression, that havethe potential to affect a firm’s market entry per-formance (Agarwal & Bayus, 2002), lead timebetween entrants (Lieberman & Montgomery,1998), and firm resources and capabilities (Pen-rose, 1956; Peteraf, 1993).

Finally, as shown in Figure 1, we stress theneed to incorporate environmental variablesinto the analysis of FMA, arguing that a compre-hensive FMA theory should complement the mi-cro (firm-level) aspect by paying equal attentionto the macro aspects. For instance, Liebermanand Montgomery explicitly recommend that re-searchers studying FMA “[re]position their workwithin the broad theoretical framework pro-vided by the Resource Based View” (1998: 1114).A joint approach, one that marries the macroand micro aspects, may provide further theoret-ical insights about the nature of firms’ resourcesand capabilities that are more suitable to acti-vate the FMA isolating mechanisms in differentenvironmental contexts.

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Fernando F. Suarez ([email protected]) is currently an associate professor of manage-ment at Boston University. He received his Ph.D. in strategy from the MIT Sloan Schoolof Management. His current research interests include the competitive dynamics oftechnology standards and platform dominance and the strategic implications ofindustry life cycle theory.

Gianvito Lanzolla ([email protected]) is currently a senior lecturer in strategy atCass Business School. He received his Ph.D. from the Universita di Roma–Tor Vergata.The main area of his research is the joint impact of technological change andinstitutional frameworks on industry structures and companies’ competitive advantage.


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the role of environmental dynamics in building a first mover